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It is 31 January 2020 and the managers of ABC Plc. are considering a change...

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Finance

It is 31 January 2020 and the managers of ABC Plc. are considering a change in the companys dividend policy. Earnings per share for 2019 for the company were 50p, and the finance director has said that he expects this to increase to 55p per share for 2020. The increase in earnings per share is in line with market expectations of the companys performance. The pattern of recent dividends, which are paid on 31 December is as follows:

Year 2019 2018 2017 2016 2015 2014
Dividend per Share (pence) 25 22.7 20.6 19.2 16.7 16.2

The managing director has proposed that 65 per cent of earnings in 2020 and subsequent years should be retained for investment in new product development. It is expected that, if this proposal is accepted, the dividend growth rate will be 11.25 per cent. ABCs cost of capital is estimated to be 15 per cent.

Calculate the share price of ABC in the following circumstances.

  1. The company decides not to change its current dividend policy.
  2. The company decides to change its dividend policy as proposed by the managing director and announces the change to the market.

(Please be more detailed, thank you very much

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